Getty Realty Corp (GTY) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Getty Realty second-quarter earnings conference call. Just a reminder, today's call is being recorded. Now for opening remarks and introductions, I will turn the call over to Joshua Dicker. Please go ahead, sir.

Thank you very much, operator. I would like to thank you all for joining us for Getty Realty's second-quarter conference call. After the close of trading yesterday, the Company released its financial results for the quarter ended June 30, 2012, and filed its Form 10-Q with the Securities and Exchange Commission. These documents are available in the Investor Relations section of our website at GettyRealty.com.

Certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and the Company's Quarterly Report on Form 10-Q filed yesterday as well as our other filings with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

You should not place undue reliance on forward-looking statements which reflect our view only as of the date hereof. The Company undertakes no duty to update any forward-looking statements that may be made in the course of this call.

With that, let me turn the call over to David Driscoll, our Chief Executive Officer.

Thank you, Josh, and prior to starting a few brief remarks I want to introduce the other officers of the Company who are on the call with me and Josh Dicker today. Mr. Leal Liebowitz, our Cofounder and Chairman; our Chief Financial Officer, Tom Stirnweis; and Kevin Shea, our Executive Vice President.

Again, I want to wish you all a very good morning. Thank you for coming to the call and listening to us today. Yesterday evening we announced that for the quarter ended June 30, 2012, we earned $3.6 million or $0.11 per share on revenues of $27.5 million. This resulted in FFO of $7.2 million and AFFO of $6.3 million, $0.21 and $0.19 per share, respectively.

All of the details are available in our 8-K and our 10-Q, which were both filed with the SEC yesterday evening, and are available on our website, the SEC, EDGAR, website and other financial media and websites.

The quarter continued to be a transitional one for us in several important ways. As we continued to move away from the impact on our results related to the bankruptcy filing of what was our largest tenant, Getty Petroleum Marketing, who I will refer to as Marketing in this call. On a longer term perspective, however, I am pleased to announce that this is most likely the last quarter we anticipate that our results will include results directly derived from Marketing, although as previously discussed we expect our net income FFO and AFFO will be lower going forward, so we can grow our way back to levels we achieved previously.

This morning, I want to highlight three items where the termination of the Marketing lease in mid-quarter had a negative impact on our results. The first is that we recognized $6.2 million of revenues during the month of April from the Marketing lease, but in accordance with [this step] immediately took a full reserve against those revenues. Thus, our revenues after reserves of $18.8 million this quarter versus $26.9 million in the same quarter last year is a better measure of our performance than a simple revenues-to-revenues comparison.

Second, we incurred material expenses for real estate taxes and other items for the Marketing portfolio during April. Essentially, this means that we had three months of costs but only two months of revenues from the Marketing portfolio for the quarter. I would encourage caution using this quarter's performance metrics to extrapolate our future performance.

Third, we continue to incur substantial legal and other costs associated with Marketing's bankruptcy proceedings. These costs add an additional drag to the quarter.

As a result of these and other less significant items, I believe it will not be until we get to our third or fourth quarter results that we will finally be in a position to report more visible run rate type quarters.

Turning to the progress we made in the quarter, as we previously announced on April 30, we had [tripled] our net lease to approximately 270 locations in six separate long-term triple net leases with regional fuel distributors. In addition, we entered into interim fuel supply agreements with global partners and other regional gasoline distributors, covering an additional 330 properties. There are also nine terminals and 141 properties whose tanks have been removed that we are seeking to dispose. We continued to make steady progress in these efforts and continue to do so in the quarter with 13 locations sold, generating approximately $4.4 million in aggregate sales price.

We are also putting significant time and effort into maximizing the long-term value of the 330 properties remaining under the interim fuel supply agreements. Many of these properties have redevelopment and reinvestment potential, both within and outside the industry. And while some of the locations will be disposed, we currently intend to relet the majority of them on triple net leases. We expect to be executing on this opportunity in the coming quarters, and in the meantime, these locations are, in the aggregate, generating cash flows from operations, thus making an overall positive contribution to our results.

Environmental remediation spending is another meaningful use of cash for us, particularly in light of our repossessions of the Marketing properties. Unfortunately, the accounting for environmental remediation obligations is very complex and the timing of when we paid for our environmental obligations differs materially from when these liabilities are accrued for or reflected in our operating results in accordance with GAAP.

Generally for this quarter, I can say that the actual cash outlays for environmental remediation properties that we historically retained were less than last year's costs. Conversely our cash outlays for the environmental remediation that were Marketing's responsibility under the Master Lease were lower this quarter than we anticipate they will be in coming quarters.

In addition on the environmental front, I am pleased to report that we have purchased a 10-year environmental insurance policy from a leading carrier, which may protect us or may provide protection to us from an unknown environmental liabilities on all our properties. The policy has a $50 million aggregate limit, subject to various self-insured retention. Therefore, we anticipate it will primarily help protect us only from significant events.

On other items, primarily operating expenses and interest costs remained in line for the quarter and in light of the structural issues on the revenue side, which I think are much more important, I do not have a particular comment on any of them at this time. We continue to work diligently and make progress every day. Perhaps the single largest reflection of these efforts is our June 15 announcement of the -- of our re-initiation of quarterly dividends. As we further rationalize the Marketing portfolio, maximize the value of the current portfolio and return to pursue the growth by our accretive acquisitions in the coming years, we will emerge a much stronger and more profitable company.

With that background, I think it is time to open the call for questions. So operator, if you can open up the queue I am happy to answer any questions that we may have.

Hello, operator? I would ask the people on the call to hold on a minute because obviously the operator seems to have lost us.

Again, if the operator is on the call, please open the queue for questions.

Thank you. (Operator Instructions). Anthony Paolone, JPMorgan.

Good morning. I was wondering if you could help me just a little bit with some of the basic revenue run rate numbers. I know the quarter was a transition one, but if I look at your quarter last year and look at the non-Marketing properties, is that a fairly safe run rate for the non-Marketing assets? I think it was about $11.3 million of net revenue for those properties.

I think if you're -- I think the general answer to that question is yes, but I don't want to necessarily want to endorse the $11.3 million only because we don't --. I don't have it at my fingertips right now and Tom is looking for it. But generally speaking, I can say that the run rate of the non-Marketing properties is roughly the same this year as it was last --.

Last year's quarter had the full effect of the [Norea] acquisition in it so it should be roughly the same.

And then, of the Marketing assets you had already disclosed 282 properties that have an annual net rent of about $17 million so we can pull that out. So if I do those two things, if I start with 1,130 properties, I get down to something like 493 properties that are either have tanks removed or either in part of this eviction process or the 330 that are month-to-month. And so, I was wondering if you could go through some of those buckets and just give us a sense as to what net rents are producing right now?

I know that you want the numbers but I would like to respectfully decline providing that kind of detail. We have not put it into the Q and I am reluctant to put that kind of detail up right now. We'll talk amongst ourselves and see if we want to publish something supplementary, but I am uncomfortable with that level of detail right now.

If I add up just the -- you mentioned the 775 properties affected by Marketing. If I just go through show some of your bullet points in the press release about what is under the licensing and Master Lease and so forth, there's still a bunch left that are unaccounted for. Are those just empty to be sold? Is that what we are -- is it like 50-something properties, I think?

I think I went through it in the remarks fairly well. There's 330 that are in interim fuel supply agreements. There's 100 -- roughly 140 left, which are the tanks removed and you can see that we are filling those at a pretty good clip right now. And the nine terminals and I think that covers all but five or six maybe of the entire Marketing portfolio.

Now inside the 330, there are to be sure some that are contributing more than others and some that are contributing very little at all because they are empty. But we are actually -- we have empty locations and each week we have a meeting and my guys tell me how many we have filled up that week. So we are actually putting new dealers into locations. Think of it as in a shopping center context, leasing in line space on a very regular basis at this point.

Okay. And the ones that are where the storage tanks have been removed, the 70 properties, but are under a month-to-month licensing agreement, what's the nature of those license agreements if there's no fuel tanks there? Like, how does that work?

It's a pizza shop, it's a car parking lot, is a car repair shop. There are, frankly, a staggering number of uses that these properties are being put to. I just learned the other day that we have a vet hospital in one of them.

So then is this idea of having a licensing entity in the middle of you all and these tenants is it just to manage that situation? Or --?

Yes, I think the licensing can get to be taken out of context. I would ask you to consider the licensing as a month-to-month lease that gives the tenant the right to be in the property because he wants to have something that says he is allowed to be there but gives us the flexibility to be able to sell the property or otherwise relet it on a month-to-month basis. The lawyers like to call it a license because in certain states if you call it a lease, it may make it more difficult to get somebody out on 30 days notice than a license and that is all there is to it. It is a nomenclature thing more than any other thing.

Okay. And then this environmental policy that you all took out. I just want to make sure I understand. Is that purely for pre-existing situation so to the extent you relet those properties, they had been relet, that the new tenant is responsible from that point forward? Like what exactly does it cover?

It protects against unknown environmental liabilities on any of the properties that we currently have. It specifically excludes known environmental liabilities but it protects us against unknown liabilities.

And the $3 million there, that's just a one-time cost? You are done for the next 10 years as it relates to this policy?

That's correct. One-time upfront and it will be spread over the life of the policy from an income statement standpoint.

Okay and -- .

And I will take a step further also to say that it is a high deductible policy. So that it is mainly there to protect against a significant event or aggregation of events for us.

Okay. And then, you mentioned that some of the properties have either redevelopment or repositioning --

Opportunities. Can you just comment on your appetite to actually put money into these assets or is this something you are going to look to the tenant to do?

I think it is a combination of both. But make no mistake about it if we can see our way clear to getting good rates of return on some of these properties and we do, then we are eager to participate to take advantage of that. I think why leave it to the tenant to get the 15% to 20% return if we can get a piece of that ourselves.

Matt Feldman, Davidson Kempner.

Good morning. Two questions. First, Anthony sort of alluded to the environmental policy question. So it covers unknown environmental issues but is there a certain timeframe by which it starts? Meaning, is it unknown environmental conditions even during Marketings tenureship or is it unknown environmental conditions starting from today?

And my second question is with regards to the 18 properties that were sold for $5.7 million, call it $315,000 per station average. Is that a fair assessment for values on a go-forward basis for that pool? And what are the net proceeds that the Company is collecting after commissions and other expenses associated with the sale?

That was three questions and here I was writing down two. First, with respect to the insurance policy. What it covers is environmental contamination that is unknown at the time that the policy was entered into. So you can think of it as known as of today and unknown going -- but discovered tomorrow. If it was known as of today then it would not be -- it would be excluded. If it is discovered tomorrow then it would be subject to the policy.

Now with respect to the sale, I -- you quoted numbers that aren't what I recall. So I want to go back and check them and I could have misspoken. But I thought that what I said was that we sold 13 properties for approximately $4.4 million of aggregate sale price. I did not do the math on the average of those.

But I would tell you that until we get a few quarters of reporting this, I don't want to go to any average in terms of sale price or endorse anything. I think it is not terribly far off, but it is not a big enough sample yet to derive any conclusions.

And then I apologize but I was trying to get the answers to the first two questions and I didn't fully hear the third question. Could you repeat that?

It was (multiple speakers) gross sales proceeds? What is the Company collecting net meaning are you paying out [net] brokers?

93% of that, it may be little bit more after legal and brokerage fees. We are providing mortgage financing but it's -- at this quarter it was less than 30% of the proceeds -- of the sale price.

Thank you.

Bruce Berger, Turnaround Capital.

Of the 330 stations that you referred to in the press release, how many are actually operating right now as functioning gasoline stations that are generating revenue?

I would say somewhere on the order of functioning gas stations, of the 330, I would say probably 320.

And in those month-to-month agreements, are you typically going to get -- these stations probably [write down] between $60,000 to $90,000 per year. Are you -- I'm not asking you for what it is, but do you expect you'll typically get that plus full reimbursement of the property taxes?

It is all over the map, Bruce. It is hard. Some of these guys pay the property taxes or reimbursements for the property taxes. Some don't. When you look at it on a net basis it is like I said it's really all over the map.

It was recently in the Getty Petroleum Marketing bankruptcy proceedings, an estimate that was put out for what the environmental liabilities are for these stations -- but I guess that you took ownership of. And I guess that number was $75 million. Just from my calculations if you take back the money that -- or if you make an assumption that you'll get some money from the states for the reimbursements for tank removal, it sort of jibes with what you estimated your tank liability will be. But, I was just wondering if you wanted to make a comment on that filing?

You know, I don't. I would be happy to try to clarify it by going into the filing. But $75 million does not jibe with our number which is really closer to $50 million comprised of the environmental liability and the tank removal liability. And that is before the reimbursement announce.

Okay.

But I think -- the $75 million, I would have to go back and look at the context and see what that meant.

(Operator Instructions). Jeff Lau, Sidoti & Company.

Good morning. Just another question on the different types of properties. Are there any that are, I guess, maybe coming against eviction? I know you mentioned there were 40 that were evicted who didn't come to any agreements but do you see any kind of on the -- any additional ones that are on the horizon?

I think you might have -- I think the wording of that is a little wrong. I mean, there are -- we have evictions proceedings going on at the present time against approximately 40 locations that are in the various portfolios. We have a handle on those and, frankly, we get small victories and small defeats every week. We got a larger victory recently and I think we are going to have complete control of 15 or 20 very valuable stations here shortly.

But there is, in Connecticut, a group of 30 plus or minus guys that have banded together that we are continuing to work with. And I really don't want to comment on that because it's -- I would describe it as a very active litigation at this time.

Is that specific group -- I mean, are they -- are you getting any income from them or is it just they are just kind of sitting there?

We are getting some income from them and we have a lease with a subtenant on it and we are working diligently to resolve that issue with the subtenant and with the group. And with the courts, if we need to.

Anthony Paolone, JPMorgan.

Can you just lay out what the cash environmental was in the quarter versus the GAAP stuff that came through the income statement? For instance, you had the $564,000 benefit on your income statement. But then, I assumed there was also some of that that was coming through depreciation. So, is there a way to just reconcile what the actual cash was with the income statement impact on the quarter?

Yes, on the bottom of page 5 in the funds flow statement we have a line which is Environmental Remediation Costs because, frankly, in recognition of the fact that the GAAP accounting has gotten so confusing on this, we are going to try to start to put out what the quarterly cash outlay for environmental was. And it is showing $1.1 million for the quarter. I am sorry, I am told that is year-to-date. Excuse me.

So $1.1 million was the cash outlay for environmental year-to-date?

Yes.

And that is for everything or just the --?

Everything. And I think that is why you sound in my remarks cautionary tales around extrapolating that number. For a whole variety of reasons we think that number will increase in the coming quarter.

So, and if we are looking just trying to understand this better if I am looking at just GAAP income statement, I guess going forward, one of the first things we should do is the environmental expense like the $564,000 benefit you had in the quarter, should we strip that out going forward? And then also ignore the D&A and then just look for you all to disclose like that some other supplementary figure?

If you are looking to get to it sort of like a cash generated number, yes. We are going to try to put the disclosure in in a way that you can do that relatively easy while still complying with GAAP.

Okay. And the -- and in your commentary you kind of broke it out into two components which I thought was helpful which is, one, you had mentioned compared to a year ago that that environmental expense that let's call it normal that you have had for a long time was a little bit less than it was a year ago. But then, the new stuff if you will was maybe lower than it is going to be going forward. Am I thinking about that right? Am I paraphrasing what you said?

You are thinking about that right. And I think that is around the fact that the historical stuff has had a relatively tame six or eight quarters and the new stuff since we have just taken it over, it's a new environmental consultant with new environmental people, we are basically putting our plans together now to go to -- rego at the environmental remediation. But you don't start incurring costs really until you start digging in the ground and doing things.

And so that's -- I think you are going to see more of that here in the coming quarters. I know some tank removals we are going to do and some other things that will impact that.

So then, at least that number though that you used to have historically that I think ran somewhere in the $1 million, $1.5 million or something a quarter range, we should still assume that kind of level going forward for that piece of it. And then, we are basically at this point left to guessing what that incremental number is going to run? Is that right?

Yes, I think that is correct. I think although and again if you look at trends the last say eight quarters or so, the historical number has been trending down and it is hard to deny now that trend is continuing because it has been going on for so long.

Bruce Berger, Turnaround Capital.

I had a question in regards GPMI used to pay Tyree Environmental for I guess ongoing remediation and consulting. And I guess you will be -- you have somebody that you will pay for that for the stations that you took back. Will that monthly expense that they were paying, how will that show up on your income statement? Would that be just a re-- will you classify that as environmental or SG&A?

It is a couple of things. First, GPMI used to pay Tyree, not only for environmental remediation but also for maintenance. We have hired contractors including Tyree. We pay them for maintenance and that you'll see as an ordinary expense on our income statement. And at the same time, to the extent that they are doing environmental remediation for us, that actually will flow through the D&A line and you are better to pick it up as we were just discussing with Tony on the cash outlay per quarter number that we are going to give you.

Do you anticipate that what they were paying Tyree is sort of what you will also be paying them per month or it will be a lot less?

I suspect -- first of all, it -- and I am not familiar with what you are seeing in the income statement. So I don't know whether that is combining the maintenance line and the environmental line. But if it is purely environmental, I expect that we will be paying roughly the same, but in the upper range of what their numbers were. Because I think we are going to be going after environmental a little bit more diligently than they were.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn it back to management for closing marks.

We appreciate your continuing to stay with us on a muggy Thursday morning in New York and we look forward to talking to you again in the fall after we have made even more progress. Have a great day.

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day.